Humana 2015 Annual Report Download - page 40

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is referred to as a “capitation” contract. The inability of providers to properly manage costs under these capitation
arrangements can result in the financial instability of these providers and the termination of their relationship with us.
In addition, payment or other disputes between a primary care provider and specialists with whom the primary care
provider contracts can result in a disruption in the provision of services to our members or a reduction in the services
available to our members. The financial instability or failure of a primary care provider to pay other providers for
services rendered could lead those other providers to demand payment from us even though we have made our regular
fixed payments to the primary provider. There can be no assurance that providers with whom we contract will properly
manage the costs of services, maintain financial solvency or avoid disputes with other providers. Any of these events
may have a material adverse effect on the provision of services to our members and our results of operations, financial
position, and cash flows.
Our pharmacy business is highly competitive and subjects us to regulations in addition to those we face with
our core health benefits businesses.
Our pharmacy mail order business competes with locally owned drugstores, retail drugstore chains, supermarkets,
discount retailers, membership clubs, internet companies and other mail-order and long-term care pharmacies. Our
pharmacy business also subjects us to extensive federal, state, and local regulation. The practice of pharmacy is generally
regulated at the state level by state boards of pharmacy. Many of the states where we deliver pharmaceuticals, including
controlled substances, have laws and regulations that require out-of-state mail-order pharmacies to register with that
state’s board of pharmacy. Federal agencies further regulate our pharmacy operations, requiring registration with the
U.S. Drug Enforcement Administration and individual state controlled substance authorities in order to dispense
controlled substances. In addition, the FDA inspects facilities in connection with procedures to effect recalls of
prescription drugs. The Federal Trade Commission also has requirements for mail-order sellers of goods. The U.S. Postal
Service, or USPS, has statutory authority to restrict the transmission of drugs and medicines through the mail to a degree
that may have an adverse effect on our mail-order operations. The USPS historically has exercised this statutory authority
only with respect to controlled substances. If the USPS restricts our ability to deliver drugs through the mail, alternative
means of delivery are available to us. However, alternative means of delivery could be significantly more expensive.
The Department of Transportation has regulatory authority to impose restrictions on drugs inserted in the stream of
commerce. These regulations generally do not apply to the USPS and its operations. In addition, we are subject to CMS
rules regarding the administration of our PDP plans and intercompany pricing between our PDP plans and our pharmacy
business.
We are also subject to risks inherent in the packaging and distribution of pharmaceuticals and other health care
products, and the application of state laws related to the operation of internet and mail-order pharmacies. The failure
to adhere to these laws and regulations may expose us to civil and criminal penalties.
Changes in the prescription drug industry pricing benchmarks may adversely affect our financial performance.
Contracts in the prescription drug industry generally use certain published benchmarks to establish pricing for
prescription drugs. These benchmarks include average wholesale price, which is referred to as “AWP,” average selling
price, which is referred to as “ASP,” and wholesale acquisition cost. It is uncertain whether payors, pharmacy providers,
pharmacy benefit managers, or PBMs, and others in the prescription drug industry will continue to utilize AWP as it
has previously been calculated, or whether other pricing benchmarks will be adopted for establishing prices within the
industry. Legislation may lead to changes in the pricing for Medicare and Medicaid programs. Regulators have conducted
investigations into the use of AWP for federal program payment, and whether the use of AWP has inflated drug
expenditures by the Medicare and Medicaid programs. Federal and state proposals have sought to change the basis for
calculating payment of certain drugs by the Medicare and Medicaid programs. Adoption of ASP in lieu of AWP as the
measure for determining payment by Medicare or Medicaid programs for the drugs sold in our mail-order pharmacy
business may reduce the revenues and gross margins of this business which may result in a material adverse effect on
our results of operations, financial position, and cash flows.